A senior Israeli official said the move greatly angered Merkel, after she had enlisted massive support of Israel over the past few weeks to help in thwarting a Security Council vote approving Palestinian membership in the United Nations.

Senior German officials told their Israeli counterparts that Merkel was "furious" and "does not believe a word [Netanyahu] says."

At Netanyahu's request, Merkel had also put major pressure on Palestinian Authority President Mahmoud Abbas to accept the Quartet's initiative and renew talks immediately, the Israeli official said, adding that Germany may now reconsider and support upgrading the PA's status to that of a non-member state in the UN General Assembly.

Senior officials said Merkel was angry particularly because of the timing, and because she felt the announcement on construction had sabotaged efforts to return the parties to the negotiating table.

National Security Adviser Ya'akov Amidror made a stealth visit to Berlin over two weeks ago, meeting with his German counterpart Christoph Heusgen and Foreign Ministry Director General Emily Haber. The meeting focused on coordinating positions regarding the Palestinian application to the Security Council and assisting Germany in formulating the Quartet's announcement, so that it would be acceptable to Israel.

German Foreign Minister Guido Westerwelle also met with Netanyahu in Jerusalem that same day on the the matter.

When French President Nicolas Sarkozy proposed in his speech to the General Assembly that the PA's status be upgraded to that of non-member observer state, Netanyahu's advisers asked senior German officials to object to the idea.

Due to the tense relations between the Palestinians and the United States, Germany was almost unique among Israel's allies in its ability to influence the Palestinians, and therefore it was Germany that Israel asked to pressure Abbas to renew negotiations.

Merkel phoned Abbas Monday to demand that he immediately return to the negotiating table.

When Merkel asked Abbas what it would take for him to resume talks with the Israelis, Abbas urged Merkel to ask Netanyahu to give the Germans or the Americans a guarantee to freeze construction in the settlements for a three-month period, during which talks on borders and security could take place.

"I don't need him to say so publicly, I need him not to embarrass us," Abbas told Merkel. Shortly after the conversation the message was conveyed to Netanyahu, however the latter did not respond.

One day after Merkel spoke to Abbas, she found out that Israel had approved the Gilo construction project. In what was described as a "furious" phone call, she spoke with Netanyahu on Friday.

Immediately after Merkel's phone call to Netanyahu, her bureau reported to the media on the content of the conversation and released a statement from which it could only be understood that Merkel had admonished the prime minister.

"The Quartet statement contained a clear condition by which the parties pledge to avoid provocative moves," Merkel told Netanyahu. "I cannot undertand how just a few days after the Quartet statement, you approve 1,100 new housing units," she added.

"The approval of the new construction creates doubts about the willingness of the Israeli government to begin serious talks with the Palestinians," Merkel told Netanyahu. "The Israeli government now has to remove these doubts about its seriousness. It is your responsibility," she told the prime minister.

Liran Dan, the prime minister's spokesman, said: "The prime minister told the chancellor that he does not see Gilo as a settlement but rather a neighborhood in Jerusalem's capital, in which all Israeli governments have built." Dan added that the conversation with Merkel "was not harsh and contained no censure."

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